Remember that sickening feeling when you open your portfolio and everything is suddenly blood-red?
I do. Last week I watched two years of gains evaporate in three trading days. The group chat was pure chaos, half the guys swearing they were selling everything, the second the market opened, the other half claiming this was “the buying opportunity of the decade.”
Both sides were emotional. Both sides were probably wrong.
When the market decides to throw a tantrum, the worst thing you can do is react like a toddler. The best investors I know – the ones who actually build life-changing wealth – all do the same thing when everything is falling apart: they slow down and run through a mental checklist.
Today I’m giving you mine. Six straightforward but brutally honest questions that have saved me from countless stupid trades (and made me money on more than a few great ones).
Why Most People Lose Money in Volatile Markets
Quick reality check: volatility isn’t new. The “fear index” spikes every year, sometimes multiple times. Yet every single time, social media explodes with the same apocalyptic takes while a quiet minority gets richer.
The difference? Process over panic.
I’ve found that if you can’t answer these six questions with confidence, you have no business touching the buy or sell button. Let’s go through them one by one.
1. Has the actual business changed – or just the stock price?
This is the mother of all questions, and honestly, most people never ask it.
We get hypnotized by the ticker tape. A stock drops 15% and suddenly we’re convinced the company is going out of business tomorrow. Meanwhile the underlying business is still growing revenue 20% a year and buying back shares hand over fist.
Step back. Read the last quarter (or two). Look at guidance. Check customer trends, competitive position, balance sheet. Ask yourself: would I be excited to buy this company at this price if it were private and I couldn’t sell for ten years?
In the short run, the market is a voting machine but in the long run, it is a weighing machine.
– Benjamin Graham
If the weight of the business is still increasing, the current “vote” doesn’t matter much.
2. Has the macro picture changed enough to permanently hurt valuation?
Okay, the company is fine. Great. But markets also price in the future discount rate – basically, what investors are willing to pay for a dollar of earnings.
When everyone is terrified of recession or convinced rates are going back to 8%, multiples compress even for perfect businesses. That’s normal and usually temporary.
The key word is temporary. I want to know whether the macro shift is cyclical or structural. A few bad PMI prints? Probably cyclical. Complete inversion of the globalization trend we’ve lived with for forty years? That’s structural and yes, multiples deserve to stay lower.
- Is inflation actually re-accelerating or are we just seeing noisy data?
- Is the Fed honestly going to hike again or are they almost done?
- Are we seeing real credit contraction or just banks being cautious?
If your honest answer is “probably noise,” then the dip in multiple is likely an opportunity, not a warning.
3. Where does the current valuation stand versus history and peers?
Now we get quantitative.
I pull up the ten-year chart of P/E, EV/EBITDA, free-cash-flow yield – whatever metric best fits the business – and ask two things:
- Is this cheap relative to its own history, adjusting for growth?
- Is this cheap relative to direct competitors doing similar things?
One of my favorite tricks is calculating a quick PEG ratio range over the past decade and seeing where we are now. If a stock that normally trades at a PEG of 1.3 is suddenly at 0.7 with the same growth outlook, I’m listening.
Same idea with banks: if a high-quality bank is suddenly trading at 8× earnings while its peer group is still 13–15×, something is wrong with the price, not the bank.
4. What is the chart actually telling me (without getting cute)?
I’m fundamentally driven, but I’m not stupid. Price action matters because it tells you where the big money is willing to step in.
I keep it ridiculously simple:
- Is the stock holding above its long-term support (200-day moving average, multi-year trend-line)?
- Is volume drying up on down days (sign of exhaustion)?
- Are we seeing any kind of reversal candle on heavy volume?
If the fundamentals say “buy” but the chart is breaking down through major support on massive volume, I wait. I’d rather miss the first 5–8% of a rebound than catch a falling knife.
Conversely, if we bounce hard off the 200-day with a volume spike, I’m usually happy to start a position or add aggressively.
5. How big is this position already – and how much dry powder do I have?
Even the best idea in the world can wreck you if you’re overweight and it keeps dropping another 30% before bottoming.
My personal rule: no single position larger than 6–7% at cost. That gives me room to average down meaningfully if I’m wrong in the short term.
If I already own 5% and I still love the name, I can comfortably add another 2–3% on weakness. If I only own 1%, I can be way more aggressive because I know I have multiple bites at the apple.
Position sizing is the difference between sleeping at night and aging ten years in a month.
6. Are there near-term catalysts (or landmines) I should respect?
Final filter: what’s coming in the next 4–12 weeks?
Earnings in two weeks? I usually wait – even great numbers can get sold if the market is scared (looking at you, Nvidia post-split).
Major regulatory decision, lawsuit settlement, or product launch? That can be a reason to lean in early.
I also pay attention to macro catalysts: Fed meeting, jobs report, CPI print. If my stock is highly sensitive to rates and we’re two days before payrolls, I’m probably waiting until the dust settles.
Putting It All Together – A Real-World Example
Let’s say you own a high-quality software company trading 25% off highs.
1. Business? Still growing 25%+, raising guidance.
2. Macro? Rates might stay higher for longer, but software isn’t capital-intensive.
3. Valuation? Now 28× forward earnings vs historical 38× and peer average 35×.
4. Chart? Bouncing off 200-day with volume spike.
5. Position? You own 2% of portfolio.
6. Catalysts? Earnings in 6 weeks, but analyst day in 10 days with new product roadmap.
That’s a screaming buy for me. I’d probably add 2–3% immediately and keep powder dry for any post-analyst-day pullback.
Flip every answer to the opposite and I’m probably selling or at least not touching it.
The time to get nervous is when the answers to these questions start going against you. The time to get greedy is when they all line up in your favor – and nobody else sees it.
Markets will always swing. Emotions will always run hot.
But if you have a repeatable process that forces you to separate signal from noise, you’ll come out the other side not just intact – but wealthier.
Print these six questions. Tape them to your monitor. Read them every time the VIX spikes and your palms start sweating.
Do that often enough and you’ll stop fearing volatile markets.
You’ll start licking your chops.
